Bank of Japan triggers
blowout in bond yields
By Tony Boyd, Global Markets Editor
A global bond market rout which started in Japan and has spread to
capital markets in the United States and Europe.
Analysts have warned of a fundamental shift in world
capital flows which may hit Wall St and weaken the
already vulnerable euro because of soaring bond yields in
Japan.
The plunge in the US bond market flowed into European
markets where German bond prices slumped and yields
rose by 80 basis points. The sell-off in Europe continued
in early trading last night.
In Australia, several fixed-interest analysts have called the
end of the bull run in Australian bonds and predicted a
further blowout in yields despite strong economic growth
and low inflation.
The rout in the Australian bond market came as bond
investors in Japan reacted negatively to moves by the
Bank of Japan to stabilise bond prices and restore
confidence in its financial management.
The BoJ, which is under intense pressure from the US to
underwrite government bond issues, gave the markets a
nasty surprise last Friday when it left the level of its long
bond purchases unchanged and lowered its overnight call
rate from 0.25 per cent to 0.15 per cent.
"This is a dangerous situation that looks bad for Wall St
and may weaken the euro," said Mr Mitsuru Saito, chief
economist at Sanwa Bank. "Bond markets in the US and
Europe are collapsing because of the sell-off in the
Japanese bond market."
Mr Saito said that real long-term yields in Japan for
wholesale investors were now more than 6 per cent,
which comprised the 2.2 per cent long bond yield and the
annual wholesale price index of --4 per cent.
He said many big Japanese institutional investors had
begun to sell Japanese Government bonds as well as US
Treasury bonds and this was worrying for global
markets.
"US 30-year Treasury bonds have risen to 5.4 per cent,
which is a very critical level that may affect the
stockmarket," he said.
Chief economist at Deutsche Bank in Australia, Mr Ivan
Colhoun, said recent movements in global bond prices
were a reflection of the fact that all capital markets had to
compete with each other for global savings.
"I think you can say that what is happening in Japan is a
bit dangerous because rising bond yields are inconsistent
with the state of their economy and it's not helping
confidence," he said.
Mr Colhoun said rising bond yields in the US were a
concern because of the close relationship between bond
yields and housing interest rates.
Mr Toshifumi Umezawa, a bond market portfolio
manager for Paribas Asset Management, said market
fears that big Japanese banks would begin unloading their
huge bond portfolios were unfounded but their activities
in futures markets would be negative for bonds in the
physical market.
"The banks need bonds for their BIS ratios because
government bonds are zero weighted," he said.
"But the banks will attempt to protect themselves by
hedging through the futures market and that may start a
price spiral in the futures market."
Yields on benchmark Japanese Government bonds have
tripled in the past four months from 0.7 to 2.2 per cent
amid rising concern among investors that the market will
be unable to absorb the ¥71 trillion ($972 billion) in new
bond issuance in fiscal 1999.
According to at least one market estimate, Japan this
year will account for up to 95 per cent of all government
debt issued in the world and its bond market will
overtake the US as the world's biggest. |
